News

‘No Bailout:’ Senators look to pre-empt aid to Detroit

A 'Detroit City Limits' border sign is seen as traffic enters a westside neighborhood in Detroit, Michigan July 22, 2013. Photo: Reuters/Rebecca Cook

WASHINGTON (Reuters) – Republicans in the Senate want to make sure the federal government does not become involved in the financial maelstrom hitting Detroit, which filed for the largest municipal bankruptcy in U.S. history last week.

They have proposed at least three “No Bailout” amendments to spending bills that the Senate is currently considering, all of which would limit the U.S. government’s ability to help cities in fiscal crisis.

Even though the amendments will likely fail in the Democrat-dominated chamber, cities and counties are alarmed by legislation they say could jeopardize funding for hundreds of local governments and are pushing back.

Senator Lindsey Graham, a Republican from South Carolina, on Thursday introduced an amendment to a financial services and general spending bill that would bar the use of federal funds to buy or guarantee a municipal asset or obligation from a locality that has defaulted or is at risk of defaulting.

It also would prohibit the U.S. government from issuing lines of credit to those municipalities or providing other aid to prevent bankruptcy.

“Should the federal government bailout Detroit? No way.” Graham said in a statement. “There is no doubt Detroit has huge problems, but they are facing problems of their own making.”

Senator John Cornyn, a Republican from Texas, also on Thursday introduced the same amendment for a transportation, housing and urban development bill that senators were debating on the floor.

It was wider in scope than the amendment to the same bill that Senator Ron Johnson of Wisconsin, Senator Orrin Hatch of Utah and Senator David Vitter of Louisiana proposed earlier in the week. That amendment would prevent using transportation and development money to keep a local government from being placed into receivership or from defaulting on its debt.

“Federal bankruptcy court is the proper venue for settling debts that taxpayers cannot afford,” Johnson said in a statement. “What must not happen is a federal bailout that spares Detroit from making the needed reforms that the bankruptcy process may require.”

Soon after Detroit, Michigan’s most populated city, filed for municipal bankruptcy, President Barack Obama and his advisers said they were monitoring the situation, but dismissed the notion of a federal bailout.

The city’s emergency manager, Kevyn Orr, has said he is not counting on aid in resolving its estimated $18.5 billion in debt and liabilities.

A federal judge on Wednesday suspended legal challenges in Michigan state courts to Detroit’s bankruptcy filing by public employee unions and pension funds, setting the stage for a protracted battle over the city’s eligibility to restructure pension and healthcare liabilities.

In the House of Representatives, Dan Kildee a Democrat from Michigan, said in a floor speech on Thursday that the filing by Detroit should inspire “a much bigger conversation in this country about how we support and fund our cities and great metropolitan areas.”

Instead of calling for special assistance for the Motor City, he said Congress should consider preserving and expanding grants already made to cities. Some of those programs are on the chopping block as the Republican-led House considers its own spending bills to avoid a government shutdown on October 1.

Another Michigan Representative, John Conyers, is calling for the House Judiciary Committee to hold hearings on municipal bankruptcy in general and to specifically investigate if the process is “being misused” to cut Detroit employees’ pensions and other benefits.

Local government groups quickly objected to Graham’s amendment. A National Association of Counties email to Senate staff said it “creates significant uncertainty as it does not define ‘at risk of defaulting, or is likely to default.’

“Furthermore, the amendment mandates the responsibility of determining the financial stability of every locality to each agency that awards federal funds to local entities, all without any specifics of the process in which they are to operate.”

Senator Carl Levin of Michigan, a Democrat, said the city of Detroit had not asked for a bailout. “But it is surely entitled to seek federal funding from existing programs,” he said in a statement.